Changing the Word ... One Deal at a Time

Jack Biddle (Economics ’83), at right, co-founder of Novak Biddle Venture Partners, with Blackboard Inc. President and Chief Executive Officer Michael Chasen. Novak Biddle was the first investor in Blackboard, which now has a nearly $1 billion market capitalization.
Photo by Tom Cogill

Fascinated by technology entrepreneurs since childhood, Jack Biddle (Economics ’83), co-founder of Washington, D.C.-based Novak Biddle Venture Partners, had a front-row seat: His father headed the Computer & Communications Industry Association, a Washington, D.C.-based lobbying group, for decades.

“I was just fascinated by how these incredibly brilliant people were able to find each other and create new industries from nothing,” he says. “For me it’s a little bit like being a patron of the symphony. I can’t write a symphony, but I can recognize people who can. And that is really what I do.”

Biddle joined a venture capital firm directly out of college but soon concluded he needed another kind of experience: “You have no right to sit on a board and tell people how to run a company if you haven’t run a company yourself.”

So he did just that, first working at technology consulting giant the Gartner Group, then leading two software companies (one in turnaround) followed by four years as CEO of a venture-backed software company he sold in 1995.

That was all the education he needed; he still has no advanced degrees. “I got my degree in economics because it sounded credible to the business world, but I wanted to be in the College of Arts & Sciences because it was so loose. … I took a lot of astronomy, a lot of computer science, a lot of history, and I spent a lot of time in the stacks just reading stuff for fun. I think a liberal arts education is the best preparation for just about anything short of doing stress calculations on a bridge design.

“My partner and I talk about the one thing that makes people really good at this business is pattern recognition, being able to see something that has never been done before but to recognize an analog to something you are familiar with. That is basically what a liberal arts education is, learning to see patterns and studying history.”

Novak Biddle accepts funding only from “people doing things [we] care about,” says Biddle. Its roster of limited partners is primarily universities, including U.Va. “Most of the top firms are almost exclusively backed by universities.

They want to work for nonprofits where the returns they generate are going to do more than line somebody’s pockets.”

Novak Biddle manages more than $580 million and focuses on mid-Atlantic-based information technology companies in the very early stage through first-round investments. It was the first investor in Blackboard Inc., with an $850,000 seed investment in 1997—when Blackboard was just two 24-year-old entrepreneurs in a brownstone basement with a passion to bring learning online. With users in more than 60 countries, today Blackboard is the world leader in online course management systems. Its 2007 revenues reached more than $239 million.

“My partner and I both care a lot about education, from a public policy standpoint and personally,” says Biddle, “and this is a deal where 20 million students are benefiting from this company that I don’t think would have made it without us.”

For these venture capitalists, the fun is more than the “ka-ching” payoff, it’s a passion for helping people to realize their dreams. Biddle describes it this way: “I have two to three hours a day with really bright people who are tackling really interesting problems that I hadn’t thought of before. You get to learn a lot about a lot and that’s just fun.

“The other cool thing is working with these people and seeing patterns and helping them off the rocks, helping to keep them from making the fatal mistake or not getting taken advantage of by a large corporation. Keeping them out of trouble so their creativity can blossom.”

Lifelong Learner
Jeff Rusinow (College ’77, MA Rhetoric and Communication Studies ’79) had the entrepreneurial bug almost from the day he arrived on Grounds.

He left school twice to satisfy this urge, then rose through the retail ranks with Macy’s, Gimbel’s and Hudson’s Bay department stores before running his own business. He returned to retail one last time, landing at Milwaukee, Wis.-based Kohl’s Department Stores, from which he cashed out in 2000 after three stock splits.

Soon after, Rusinow began hosting high-net-worth individuals at his home to discuss angel-investing opportunities. The result was Milwaukee’s first angel group, Silicon Pastures (a tongue-in-cheek nod to its geographic roots). In its first three years, the group saw hundreds of deals and invested in 15.

“For every 10 deals that an angel gets involved in, three go bankrupt, three are basically treading water forever, and two or three do OK, with an internal rate of return of between 20 and 25 percent,” says Rusinow. “But one out of 10 has to be a home run. And when I say home run, you’ve got to run around the bases a couple of times. It needs to be a 10-bagger because if it is not and you blend all that, it’s not a reasonable ROI [return on investment] for the risk you are taking.”

Rusinow glimpsed one of his biggest 10-baggers when he met—on his front lawn—two 20-somethings who had a plan to sell costumes on the Internet. The Internet bubble had popped and caught them well short of their lofty start-up capital goals. They had been looking for $5 million in capitalization from bankers, but Rusinow had a different deal. He would take 25 percent of the company and provide significantly less capital (from him and later from some two dozen other investors) but throw something else into the deal: his expertise, stepping in as chairman.

BuySeasons Inc. (known for its website, BuyCostumes.com) went from zero to $50 million in revenues in its first seven years. After ranking No. 75 on Inc.’s 2005 list of the top 500 fastest-growing private United States companies, it sold for $60 million to Liberty Media Corp. in 2006. A “nice hit,” says Rusinow.

Rusinow’s subsequent successes found him stepping outside his retail comfort zone. He has been actively involved in the strategy and operations of several successful health-care-related start-ups, including ModernMed, whose mission is to deliver a patient-centered, primary-care experience. Rusinow is lead investor and chairman.

“There is a recommendation that as an angel you should only invest in businesses and technologies you are familiar with,” he says. “I took a different tack. I like to get involved in things that I know nothing about. It is fascinating for me, furthering my education in that you just learn so much about things going on in other industries and technologies you never would have even thought about. It is really fun.”

Angels in Virginia
Dick Crawford (College ’67, Darden ’74, Law ’74) and Letitia Hickman Green (Spanish ’84) founded the Virginia Active Angel Network. Crawford took a traditional route, packing up a briefcase full of advanced degrees and heading to banking. He found himself at the epicenter of the technology revolution in Silicon Valley and became fascinated by the challenges of financing emerging knowledge-based companies. “One of the problems that you had then and that you still have today is that the traditional financial system, banks, typically do not fund the types of companies that are being spun out of universities and that we talk about as being angel investment or venture capital investment opportunities,” he says.

Green supplemented her U.Va. degree with an M.B.A. from Pepperdine University. After a stint at Oppenheimer & Co. Inc. in New York, she became the fourth hire at a spartan midtown start-up private-equity firm: the Blackstone Group. Now legendary, the Blackstone Group manages assets of about $100 billion. Green followed Blackstone with investment-banking leadership positions on the West Coast and her own mergers-and-acquisitions consulting firm.

Soon after arriving in Virginia as a cashed-out entrepreneur in 2005, Green met Crawford. He instantly knew that she would be a perfect partner for the angel venture he had been developing at U.Va.’s Darden School.

“Typically, angels invest individually,” says Crawford. “We provide a mechanism for bringing [entrepreneurs and angels] together efficiently and therefore actually helping the business succeed.”

They officially launched VAAN that October. Today, the group has 28 members with chapters in Charlottesville, Blacksburg and Richmond. They have viewed some 300 presentations and fund two to three each year.

Proposals are considered by a committee that includes Darden students, and two are chosen for monthly presentations. Presentations with positive feedback are put through an exhaustive due-diligence process headed by Green that results in a final, comprehensive analysis. If four or more members will make the minimum $25,000 commitment, the group moves forward. Recently, VAAN invested $250,000 in Charlotte, N.C.-based ESP Systems LLC, whose wireless technology connects waiters and kitchen with restaurant patrons—a deal reported in The Wall Street Journal.

VAAN also helps entrepreneurs move to the next funding stage. Because venture-capital firms often look at 4,000 to 5,000 business plans annually, the best an entrepreneur often can hope for is a quick review from a junior associate. “But,” says Crawford, “if I e-mail a V.C. [venture capital] contact and say we’ve done this work and made this investment, it is much more likely that the entrepreneur will get a meeting, which is precisely what he or she needs.”

The Social Entrepreneur

Right after graduating, fate landed Jacqueline Novogratz (Economics ’83) at Chase Manhattan Bank, where she worked in 40 countries and learned about the bank’s money portfolio. In 2001, Novogratz founded Acumen Fund, a nonprofit venture fund that raises philanthropic capital to support entrepreneurs who fight global poverty by delivering critical goods and services such as health care, housing, energy and clean water to people living on less than $4 a day. Fast Company magazine recently named Acumen Fund among its “45 Social Entrepreneurs Who Are Changing the World.”

“At Chase, I really fell in love with banking, which leveraged my liberal arts education because the work drew on the intersection of economics, politics and what I quickly became interested in, which was the whole anthropological aspect of sociology, class and culture,” she says. After Chase, Novogratz opened Rwanda’s first microfinance bank, then founded and directed The Philanthropy Workshop and the Next Generation Leadership program at the Rockefeller Foundation before bringing together all she had learned in a new model of philanthropy.

“It was time to break all the existing rules and focus on contributing to a new model for philanthropy,” says Novogratz. “What I’ve realized since then is that instead, we’re focused even more on the best use of all of our resources toward solving tough problems of poverty by starting with the market as our best listening device.”

Incorporated with seed capital from the Rockefeller Foundation, Cisco Systems Foundation and three individuals, New York City-based Acumen Fund is built around the idea of “patient capital,” providing loans or equity (not grants) that yield both financial and social returns. Financial returns are recycled into new investments.

“Poor people seek dignity, not dependence,” is one of the fund’s core beliefs, whether as entrepreneur delivering services and creating jobs or as paying customer. In India, where more than 450 million people still lack access to affordable, clean water, Acumen Fund has already made a difference, says Novogratz. “We are investing in one water entrepreneur in India and supporting the business with a great deal of management assistance. We’ve been able to leverage our philanthropic dollars so that our $600,000 investment helped leverage another $12 million capital through additional equity to the company, which now operates in over 100 villages and serves 300,000 paying customers.”

Whether eliminating world poverty, improving health care or just making restaurant service faster, these venture capitalists are in it to make the world a better place. “At the end of a six- or eight- or 10-year journey together with an entrepreneur,” says Biddle, the fulfillment comes in watching “the company go public or be acquired for hundreds of millions of dollars. And for the team to share in that, for the stock options to change lives, to watch the CEO become a philanthropist. … That is really cool. … And to know it wouldn’t have happened without your patronage.”

Venture capitalism is a subset of private equity, or investment-ownership. Usually, the funding game begins with angel investors. Angels range from wealthy individuals to organized groups that pool resources and expertise to provide start-up entrepreneurs with their first boost, usually at the earliest and riskiest time in the venture’s life cycle, just after family and friends have invested.

Next up the chain are venture-capital firms specializing in “seed” stage companies that have no track record of success, little—if any—income and need substantially larger investment than angels provide. Then come venture firms focusing on “expansion stage” companies and, finally, those specializing in corporate buyouts.

What unites these organizations is a common goal: either a lucrative purchase by another company or an initial public offering. To get there, angels generally look for four- to seven-year involvement while some later stage firms are in it for the shorter haul.